Alex Rabinovich, of San Francisco, California, a stockbroker registered Forge Securities LLC, is the subject of a customer intiated, investment related FINRA securities arbitration claim seeking $3.12 million in damages, and alleging that Rabinovich “failed to conduct adequate due diligence before recommending an investment that “turned out to be a fraudulent scheme.”
According to FINRA Public Disclosure, Rabinovich has stated that he and Forge Securities deny the allegations in the arbitration’s statement of claim and consider them to be unfounded and without merit.” They also claim that the “Claimants were represented by their own investment adviser with respect to the investment opportunity. The Representative and Forge Securities further note that the Claimant received disclosures and acknowledged in writing that neither the Representative nor Forge Securities was providing investment recommendations.”
It is well settled that a securities dealer must have an adequate and reasonable basis in order to “recommend” a security. In connection with recommendations, securities dealers “owe a special duty of fair dealing to their clients.”
What is a “recommendation” can be a complex issue. The NASD (now FINRA) has consistently stated that “whether a security is recommended does not necessarily depend on the member’s classification of the security as ‘solicited or unsolicited.’” In particular, a transaction will be considered to be recommended when the member brings the specific security to the attention of the customer through any means, including, but not limited to direct telephone communication, the delivery of promotional material through the mail, or the transmission of electronic messages.” NASD Notice to Members 96-60 at 473-74 (September 1996).
In 2001, the NASD provided additional guidance as to what constitutes a “recommendation,” and stated the determination of whether a recommendation has been made is an objective, rather than a subjective inquiry. An important factor in this regard is whether – given its content, context, and manner of presentation – a particular communication from a broker dealer to a customer reasonably would be viewed as a ‘call to action.’” NASD Notice to Members 01-23 at 2 April 2001.
The New York Stock Exchange, in its interpretation of The New York Stock Exchange Rule 472(j)(1), relating to Recommendations, (as incorporated into the FINRA Code), states that:
For purposes of these standards, the term “recommendation” includes any advice, suggestion or other statement, written or oral, that is intended, or can reasonably be expected, to influence a customer to purchase, sell or hold a security.
NYSE Rule Interpretations Rule 472(j)(1)(CCH 2009)
In any event, Suitability determinations are a two-step process: the first step is reasonable diligence as to the risks associated with a particular security to determine if the product is suitable at all; the second step is to determine whether it is suitable for a specific client given their overall financial condition and expressed investment objectives.
As the US Securities & Exchange Commission, in its approval of the consolidated FINRA Suitability Rule observed:
Reasonable-basis suitability requires a broker to have a reasonable basis to believe, based on reasonable diligence, that the recommendation is suitable for at least some investors.
In general, what constitutes reasonable diligence will vary depending upon, among other things, the complexity of and risks associated with the security or investment strategy and the firm’s or associated person’s familiarity with the security or investment strategy.
A firm’s or associated person’s reasonable diligence must provide the firm or associated person with an understanding of the potential risks and rewards associated with the recommended security or strategy.
See Securities Exchange Act Release No. 63325 (November 17, 2010)(emphasis added).
The Guiliano Law Group, P.C.
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